Paul Gvoth EBA-Norfolk, VA November 18, 2009

1. Hampton Roads Area INCOSE/SCEA Decision Analysis Conference Economic Benefits Analysis The “Other-Side” of Cost Paul Gvoth EBA-Norfolk, VA November 18, 2009 This document is confidential and is intended solely for the use and information of the client to whom it is addressed. Economic & Business Analysis - Norfolk Pre-Decisional Analysis and Data

2. Agenda Introduction Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis Tiered Approach Example References Pre-Decisional Analysis and Data

3. Introduction • Why this is important? • Acquisition Requirements • Nunn-McCurdy (15% , 25%, ‘82) • Clinger-Cohen (ITMRA –’96, CIO) • GAO Audits and Tracked Recommendations (IG reporting to Congress) • Internal Competition for Resources (POM and FYDP, POPS) • Justification to External Entities • Decision Analysis – Selection of Preferred Alternative among all Viable Alternatives (AoA) • Integral part of an overall Economic Analysis (EA), ROI Pre-Decisional Analysis and Data

4. Agenda Introduction Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis Tiered Approach Example References Pre-Decisional Analysis and Data

5. Cost Analysis and Benefits Analysis Share Some Technical Points • Cost Analysis • Analogy • Parametric • Engineering Build-Up • Expert Opinion • Extrapolation from Actual • Cost Element Structure (CES) • Benefits Analysis • Analogy • Parametric • Engineering Build-Up • Expert Opinion • Extrapolation from Actual • Benefits Elements Structure (BEM) Both analyses sensitive to up-front important analytical decisions about allocations and application of economic concepts (NPV, ROI, BE) • Benefits Element Structure • R&D and T&E • Military Personnel • Operations and Maintenance • Procurement • Construction Pre-Decisional Analysis and Data

6. However, there are important differences… • Cost Analysis • Well recognized published sources of cost information • Risk is better understood (CSPT) • Common Accepted Terms- of-Reference Across Field • Less Reliance on Expert Opinion • Certification for Analysts • Navy Center for Cost Analysis (NCCA) • Cost Analysis Improvement Group (CAIG) • Benefits Analysis • Analogies for new programs do not exist and little published benefits data • Parameters are often unknown • Terms-of-Reference • Heavy use of Expert Opinion • Risk not well defined • No organized Benefits Analysis Community • Quality of Benefits Analysis dependent upon client environment • Less scrutiny then costs but high impact on Decision Metrics Pre-Decisional Analysis and Data

7. Agenda Introduction Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis Tiered Approach Example References Pre-Decisional Analysis and Data

8. Develop Benefits Framework Evaluate Risks Produce LCCE Estimate Benefits Benefits Analysis Methodology - Four Steps: Identify the functional capabilities of the Preferred Alternative (PA) and the Status Quo (SQ). Develop the benefits model by allocating benefits to the four tiers of the framework described below. Estimate the monetary value of the quantitative benefits by combining the LCCE, cost savings, and operational efficiencies. This will yield an ROI, NPV, and Payback Period calculations. Address the improved operational capabilities resulting from the preferred alternative’s implementation within the context of risk. Pre-Decisional Analysis and Data

9. Benefits are Classified According to a 4-tier Approach* Cost Savings/Avoidance • Tier 0 consists of monetary cost savings determined by subtracting the costs associated with the PA from the current cost to maintain the SQ. • Tier 1 includes mission critical operational efficiencies directly related to the drawdown of inventory in terms of cost avoidances. • Tier 2 includes achievable operational efficiencies subordinate to the efficiencies received in Tier 1, but which still provide cost avoidances to the Marine Corps. • Tier 3 consists of qualitative benefits associated with the implementation of the Preferred Alternative. Cost avoidances account for the bulk of GCSS benefits and is the focus today *Based on Guidance from OSD PAE: Methodology captures inherent subjectivity and relative risk. Cost savings increase incrementally and cumulatively from “initial outlay” benefits to the inclusion “must have” benefits to the inclusion of “nice to have” benefits. Pre-Decisional Analysis and Data

10. Pre-Decisional Analysis and Data

11. Agenda Introduction Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis Tiered Approach Example References Pre-Decisional Analysis and Data

12. GCSS-MC EA Up-Front Summary • Preliminary ROI calculations demonstrate that sufficient Operational Efficiencies are achievable in GCSS-MC to generate a positive ROI for Block I, and its increments, providing support to proceed with program development • GCSS-MC business value resulting from the investment in new system capabilities is expressed as Operational Efficiencies that can be evaluated using USMC Logistics Chain Management (LCM) Balanced Scorecard Metrics and Joint Staff LCM Metrics • Reconciled NCCA LCCE amounts will be included in future ROI analyses • Benefits Analysis and LCCE will be finalized prior to the MS C decision • Analyzed all that we could gather data on, but not as much as we wanted Pre-Decisional Analysis and Data

13. Global Combat Support System (GCSS) Marine Corps (MC) Benefits Analysis – Purpose: Review Preliminary Financial Results of GCSS-MC Economic Benefits Analysis relative to the Marine Corp’s investment in the capabilities set out in the Capabilities Production Document (CPD) Discuss GCSS-MC Economic Benefits resulting from program investment in Logistics Chain Management (LCM) Capabilities Review Economic Metrics expressed as monetized business value returning to the USMC from GCSS-MC program investment Pre-Decisional Analysis and Data

14. Data Sources, Tools, Applied Analysis • Collected Marine Corps data from: • USMC LOGCOM – Albany, • GA, USMC HQ I&L, DC, and from • USMC Maintenance and Supply Records. • Applied business analytics tools such as: • Expert Choice (AHP), • SPSS, • Excel • …to collect capability attribute weights, calculate averages, and graphically display data. Pre-Decisional Analysis and Data

15. Economic Analysis Products • Performance Improvement Metrics Table (PIMT) Effort (Briefed April 2009) • Identified the functional/operational capabilities of the GCSS-MC/LCM Block 1 Alternative and the SQ sourced from the Capabilities Production Document (CPD) • Developed metrics that are linked to each operational capability • Economic Viability to Support IRB Certification (August/September 2009) • Develop the benefits model by extracting benefits to the benefits analysis framework • Allocate benefits into the four tier break-out of Tier-0, Tier-1, Tier-2, Tier-3 • Estimate the monetary value of the quantitative benefits by combining the Program Office LCCE (PLCCE), cost savings, metrics results, and operational efficiencies • Calculate the NPV, ROI, and Payback Period calculations using PLCCE data • Milestone C (Through January 2010) • Update the Benefits Analysis, NPV, ROI, and Payback Period calculations with the NCCA-reconciled LCCE • Achieve OSD PA&E review and approval Pre-Decisional Analysis and Data

16. Outputs SQ LCCE PA LCCE Benefits Analysis Return on Investment (ROI) Net Present Value (NPV) Payback Economic Analysis Document Economic Analysis Process Block 1 Economic Analysis Process Data Collection Risk & Sensitivity Analysis Develop Status Quo LCCE Develop Preferred Alternative LCCE Cost Analysis Requirements Description (CARD) Update and Finalize Cost and Benefit Analyses NCCA Reconciliation Economic Analysis Development Plan (EADP) Develop Performance Improvement Metrics Table Establish Ground Rules & Assumptions Establish Economic Analysis Approach Conduct Benefits Analysis Current Pre-Decisional Analysis and Data

17. Capabilities Linked to Joint and USMC LCM Balanced Score Card Metrics • Capabilities Produced by Investment in GCSS-MC • Investment in GCSS-MC produces capabilities in the following Logistics Chain Management (LCM) Areas: • Request Management (22.5%) • Supply (30.6%) • Maintenance (30%) • Finance (5.2 %) • System Administration (11.%) • New and improved capabilities create performance improvements or operational efficiencies • Performance of capabilities are evaluated using Joint and USMC Balanced Score Card Metrics • GCSS-MC tracks and balances capability performance relative to the scorecard metrics, creating Operational Efficiencies • The amount of Monetized Economic Benefit derived from the implementation of GCSS-MC Block 1 is directly related to the degree of Operational Efficiencies generated by the new or improved capability Pre-Decisional Analysis and Data

18. Capabilities Linked to Balanced Score Card 1 The “Simplicity” Joint Attribute has been omitted because it does not map to a specific USMC Balanced Scorecard Attribute 2 GCSS-MC Capability Production Document (CPD) Draft October 2008 Pre-Decisional Analysis and Data

19. Performance Improvement Metrics Table (PIMT) • “The Performance Improvements Metrics Table must reflect metrics which quantify the performance improvements that will result from the modernization as justification for the investment.” – DITPR-DON Tier 1-3* Certification Reporting Requirements • Shows the performance metrics associated with operational efficiencies (OE) gained by implementing the new system increment • Purely operational improvements – no costs or monetized benefits are associated with the PIMT • Compares operationally the differences between the legacy and future system • Provides the expected time for the improvement *DoD and DoN Business System Investment Tiers based on total development costs. Tier 1-3 are greater than $1million. Pre-Decisional Analysis and Data

20. Performance Improvement Metrics Table Pre-Decisional Analysis and Data

21. Performance Improvement Metrics Table Pre-Decisional Analysis and Data

22. Performance Improvement Metrics Table Pre-Decisional Analysis and Data

23. Performance Improvement Metrics Table Pre-Decisional Analysis and Data

24. EA Results - Block I • ROI calculated using the Program’s LCCE • Benefits Based on Total Block I (Release 1.1 + Release 1.2) • PV of Benefits: $1,219.07M • PV of Costs: $603.87M • Benefit Cost Ratio: 2.02 • ROI: 3.40 Break Even at 2014 Pre-Decisional Analysis and Data

25. Top Ten Benefits • $53M IT Direct Cost Savings • $273.4M Inventory Reduction • $797.4M Inventory Carrying Cost (ICC) Reduction • $191.6M Repair Part Reduction • $196.9M MLDT Reduction (Asset Value Recapture & Availability) • Expanded User Base - GCSS will expand user base to approximately 40 percent of 57,000 potential users • Improved readiness • Enables compliance • Expanded Capability • USMC Integration with Joint Chiefs of Staff Joint Integrated Capabilities (JIC) Joint Attributes for Logistics Chain Management (LCM) Pre-Decisional Analysis and Data

26. EA Results - Release 1.1 • ROI for Release 1.1 is a sub-set discount analysis of Block I • Benefits Analysis for Release 1.1 • PV of Benefits: $896.69M • PV of Costs: $309.51M • Benefit Cost Ratio 2.90 • ROI 5.32 Pre-Decisional Analysis and Data

27. EA Results - Release 1.2 • ROI for Release 1.2 is a sub-set discount analysis of Block I • Benefits Analysis for Release 1.2 • PV of Benefits: $317.50M • PV of Costs: $293.94M • Benefit Cost Ratio 1.08 • ROI 1.20 Pre-Decisional Analysis and Data

28. Direct Cost Savings • $53M IT Cost Savings • After Release 1.2 FOC (FY13), the four legacy systems will be phased out • Approximately $4.5 Million per year after legacy system phase-out • Assume legacy costs will not increase annually due to long term maintainability issues • Researching potential SQ investment and increased sustainment costs due to SW and HW obsolescence • Initial cost savings are typically negative Pre-Decisional Analysis and Data

29. Inventory Reduction • $273.4M Inventory Reduction • USMC Class IX inventory estimated at $1.2 Billion • Block I one-time inventory reduction (IR) draw-down estimated between 15% and 25%* • Used 20% figure in PIMT analysis • One time drawdown of inventory for this analysis is spread across the first 5 years after FOC • Inventory is shown to be 90% within the Enterprise, and 10% Deployed • Release 1.1 IR estimate for the ROI is $189.83 Million; Release 1.2 IR Estimate $53.54 Million *Based on proprietary BAH industry studies and USMC I&L Business Case Pre-Decisional Analysis and Data

30. Inventory Reduction *Based on proprietary BAH industry studies and USMC I&L Business Case Pre-Decisional Analysis and Data

31. Inventory Reduction by Release Pre-Decisional Analysis and Data

32. Inventory Carrying Costs Reduction • $797.4M Inventory Carrying Cost (ICC) Reduction • Inventory Carrying Cost (ICC) factor is 25% of inventory reduction value. ICC is a recurring cost avoidance that will be used to write down the future investment • Release 1.1 ICC estimate $47.6M; Release 1.2 ICC Estimate $13.39M • ICC avoidance will occur every year after FOC Pre-Decisional Analysis and Data

33. Inventory Carrying Costs Reduction Pre-Decisional Analysis and Data

34. Repair Part Reduction • $191.6M Repair Part Reduction • Analyzed SOE maintenance transactions for the period FY 2007 thru April 2009 • 37,480 unique consumable NSNs from maintenance transactions representing 335,648 appearances in 87,500 Equipment Repair Orders (ERO) • 626,677 parts were required, but 948,020 were ordered valued at approximately $551.7 Million • Difference of 321,343 “over-ordered” parts for the period of analysis is valued at approximately $36.5 Million • Annualized adjustment for the period of analysis indicates that approximately 128,537 extra parts were ordered, valued at $14.6 Million per year, every year • Annual Benefit for Release 1.1 is $11.4M and Release 1.2 is $3.22M • Cost avoidance will occur every year after FOC Pre-Decisional Analysis and Data

35. Repair Part Reduction Pre-Decisional Analysis and Data

36. MLDT Reduction • $196.9M MLDT Reduction (Asset Value Recapture & Availability) • For our period of analysis, (FY 07 thru April 3 FY 09), $23.1B dollars of USMC assets were sitting idle due to a total Maintenance Down Time (MDT) of 3.8M days, representing 87,427 Equipment Repair Orders (ERO) • The average MDT per ERO is approximately 41 days, which is comprised of Labor Hours, Average Logistics Delay Time (ALDT), and other MDT attributes • ALDT is approximately 21 days • Modest 10% reduction in ALDT to 19 days results in a one-time benefit of $175.31M in Asset Value and Equipment Availability • Benefit allocated to Release 1.1 is $136.74, and to Release 1.2 is $38.57 • Prorated across five years starting at FOC Pre-Decisional Analysis and Data

37. MLDT Reduction Pre-Decisional Analysis and Data

38. User Base Expansion • Expanded user base should increase supply chain velocity through greater user access, increased order accuracy and increased transaction speed. • Current legacy system user base is approximately 13,000 • GCSS will potentially expand user base to approximately 56,965 • There is no reduction in FTEs resulting from implementation of GCSS-MC. Pre-Decisional Analysis and Data

39. Readiness and Compliance • Readiness • Improved visibility of assets throughout enterprise including warranty status, and serial number tracking of secondary repairables and end items • Inventory posture and readiness is visible throughout enterprise allowing for improved resource allocation and optimal stockage at wholesale, retail and consumer level • Establishes automation of maintenance history including major sub-component (SL-4) configuration of end items • Compliance • Enables USMC to comply with Joint Financial Management Improvement Program requirements • Enables USMC to comply with SFIS requirements • Enables USMC to comply with IUIDrequirements Pre-Decisional Analysis and Data

40. Legacy System Risks • Cost Avoidance • Annual increased legacy systems costs due to long-term maintainability issues • Legacy systems are currently grandfathered and do not have to comply with SFIS and IUID due to the imminent replacement of the legacy systems • If GCSS-MC is not implemented, support for the legacy systems in their current configuration would become untenable. USMC would need to commission a revision to modernize the code and functionality. Due to the revision, the legacy systems would then be forced to comply with Standard Financial Information Structure (SFIS) and Unique Identification (IUID). • Need to develop costs for SFIS and IUID compliance Pre-Decisional Analysis and Data

41. Additional Capability • Expanded Capability • Ability to report more accurate and timely operational availability of all equipment/weapon systems • Ability to create, save, and reutilize logistics plans and bills of material for TEEP events and real world operations • Ability to task organize units with their associated equipment, supplies, and personnel within the GCSS-MC • Streamlined and timely table of allowance and equipment (T/O and T/E) item update/management through daily interface with TFSMS • Streamlined budgeting, improved visibility of maintenance costs, ability to establish financial responsibility at any echelon Pre-Decisional Analysis and Data

42. Balance Scorecard Attributes (% = Attribute Weight) 25% 20% 20% 15% 10% 10%

43. Attribute: Readiness • The Tier 1 performance metric for Readiness is Operational Availability, measured through lower-tier metrics with the following formula and illustrated in the figure below: Operational Availability = ___________Uptime__________ Uptime + TTR + SRT + DART

44. Attribute: Responsiveness • The Tier 1 performance metric for Responsiveness is Total Fulfillment Cycle Time, measured through lower-tier metrics with the following formula and illustrated in the figure below: Total Fulfillment Cycle Time = Request Cycle Time + Order Fulfillment Cycle Time

45. Attribute: Reliability • The Tier 1 performance metric for Reliability is Quality Order Fulfillment, measured through lower-tier metrics with the following formula and illustrated in the figure below: Quality Order Fulfillment = [# Repair Orders X %QOF (Maintenance)] + [# Requisitions X %QOF (Supply)] (# Repair Orders) + (# Requisitions)

46. Attribute: Flexibility • Flexibility is measured with the Tier 2 metric Fulfillment Capacity, which is the highest-level metric used to measure logistics chain capacity. Fulfillment capacity is measured through lower-tier metrics through the following equation and as illustrated in the figure below: Fulfillment Capacity = Upside Make Capacity + Upside Warehouse Capacity + Upside Purchase Capacity + Upside Transportation Capacity

47. Attribute: Expense • The Tier 1 performance metric for Expense is Total Logistics Expense, measured through lower-tier metrics with the following formula and illustrated in the figure below: Total Logistics Expense = Total Maintenance Expense + Total Supply Expense + Total Distribution Expense

48. Attribute: Asset Utilization • The Tier 1 performance metric for Asset Utilization is Asset Utilization, measured through lower-tier metrics with the following formula and illustrated in the figure below: Asset Utilization = (Maintenance Asset Utilization, Supply Asset Utilization, Transportation Asset Utilization)

49. Way Forward Expanded Risk Analysis Life Cycle Return on Investment Analysis Optimized Benefits Relative to Cost Post Investment Analysis Pre-Decisional Analysis and Data

50. Agenda Introduction Similarities/Differences in Benefits Analysis Approach vs. Cost Analysis Tiered Approach Example References Pre-Decisional Analysis and Data